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Article 2 – Taxes covered under Double Taxation Avoidance Agreement ?.

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May 31, 2021 |

21 mins read

Article 2 – Taxes covered under Double Taxation Avoidance Agreement

Article 2 taxes covered

This Article provides the details of taxes, which would be covered for the purpose of tax Treaty.   Any tax which is not provided in Article 2 is outside the purview of the tax Treaty.

Article 2 defines the taxes, to which the Treaty shall apply. Generally, it applies to taxes on (a) Income and (b) Capital. Such taxes are imposed on behalf of a Contracting State or of its political subdivisions or local authorities and would be covered, irrespective of the manner in which they are levied, i.e, they could be levied directly or deducted as tax at source (TDS in Indian context).

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Article/Para No. OECD Model Tax Convention on Income and on Capital 2017 UN Model Convention 2017
2 Taxes Covered Taxes Covered
1 This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.
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Comments

UN & OECD Models: Article 2(1) of the OECD Model and Article 2(1) of the UN Model are identically worded.

US & OECD /UN Models: The differences between OECD and UN Model have been highlighted in bold and italics in the UN Model column.

2 There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
Comments : –

UN & OECD Models: Article 2(2) of the OECD Model and Article 2(2) of the UN Model are identically worded.

US & OECD /UN Models: The differences between OECD and UN Model have been highlighted in the UN Model column.

3 The existing taxes to which the Convention shall apply are in particular:

a) (in State A): ……………………..

b) (in State B): ……………………..

The existing taxes to which the Convention shall apply are in particular:

(a) (in State A): ……………………..

(b) (in State B): …………………….

Comments

UN & OECD Models: Article 2(3) of the OECD Model and Article 2(3) of the UN Model are identically worded.

4 The Convention shall also apply  to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their taxation laws. The Convention shall also apply  to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of significant changes made to their tax law.
The purpose of this Clause is to cover any subsequent taxes of the nature covered under the Treaty, which could be imposed additionally or to replace the existing taxes. The Contracting States are under an obligation to notify each other of significant changes made to their tax law.
Comments

UN & OECD Models: Article 2(4) of the OECD Model uses the expression “taxation laws” while Article 2(4) of the UN Model uses the expression “tax law” (The pre-1999 version of the UN Model used the expression “taxation laws”).

OECD & UN Models: The differences between OECD and UN Model have been highlighted in the US Model column.

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One of the very basic question, which arises in the mind of a taxpayer evaluating Double Taxation Avoidance Agreement, is, Which taxes are covered under Double Taxation Avoidance Agreement ? Or in other words, can I claim the benefit of all taxes which may be payable in the source country, or only certain specific taxes are eligible for benefits?

Let us discuss these aspects in detail : –

WHY IS ARTICLE 2 RELEVANT?

  • Only taxes covered under Article 2 are covered under Treaty.
  • Ascertain if surcharge is to be applied in addition to Tax rates.
  • Avoid need to renegotiate Treaty for changes on local levy ( India – SC + Education Cess )

WHICH TAXES ARE COVERED UNDER ARTICLE 2 DOUBLE TAXATION AVOIDANCE AGREEMENT?

  • Indirect taxes are not covered under Article 2.
  • Non-Discrimination – Article 24 & Exchange of Information – Article 26 are applicable to all taxes.
  • Research and development Cess not covered by Article 2 – ( Netherlands Treaty Protocol ).

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ARTICLE 2 (1) – INDIA NETHERLANDS TREATY

This Convention shall apply to
taxes on income and on capital
imposed on behalf of
one of the States or
of its political subdivisions or
local authorities,
irrespective of the manner in which they are levied

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ARTICLE 2(1) – INDIA USA TREATY

The existing taxes to which this Convention shall apply are :

(a) In the United States, the Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated
earnings tax, the personal holding company tax, and social security taxes), and the exercise taxes imposed on insurance
premiums paid to foreign insurers and with respect to private foundations (hereinafter referred to as “United States Tax”);
provided, however, the Convention shall apply to the exercise taxes imposed on insurance premiums paid to foreign insurers only
to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes
under this or any other Convention which applies to these taxes ; and

ARTICLE 2(1) – INDIA USA TREATY

(a) in India : –
(i) the income-tax including any surcharge thereon, but excluding income-tax on undistributed income of companies, imposed under the Income-tax Act ; and
(ii) the surtax (hereinafter referred to as “Indian tax”).
Taxes referred to in (a) and (b) above shall not include any amount payable in respect of any default or omission
in relation to the above taxes or which represent a penalty imposed relating to those taxes

KEY FEATURES OF ARTICLE 2

Key features of Article 2

WHICH TAXES ARE COVERED ?

Which taxes are covered

ARTICLE 2 (2) – INDIA NETHERLANDS TREATY

There shall be regarded as taxes on income and on capital
all taxes imposed on total income,
on total capital, or
on elements of income or of capital,
including taxes on gains from the alienation of movable or immovable property,
taxes on the total amounts of wages or salaries paid by enterprises,
as well as taxes on capital appreciation.

What shall be regarded as Taxes on income and on capital ?

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Which Taxes are covered under Article 2 – Double Taxation Avoidance Agreement

KEY FEATURES

  • Taxes on Income & Capital 
    • Income should be considered as per Section 2(24) of the IT Act, 1961
    • Excludes (a) Property tax; and (b) Tax computed on a basis, other than income.
  • Whether “Tax” includes interest/ penalty ?
    Interest and penalties are generally not considered as “Tax” under Indian Treaties
  • Capital Appreciation
    UN Model considers taxes on revaluation of Assets . In India ?
  • Excluded taxes
    Art 2(2) may exclude specific source State taxes.

ARTICLE 2(2) – INDIA USA TREATY

The Convention shall apply also to any identical or substantially similar taxes
which are imposed after the date of signature of the Convention
in addition to, or in place of, the existing taxes.
The competent authorities of the Contracting States shall notify each other
of any significant changes which have been made in their respective taxation laws and
of any official published material concerning the application of the Convention.

KEY FEATURE OF ARTICLE 2(2) OF INDIA USA TREATY

KEY FEATURE OF ARTICLE 2(2) OF INDIA USA TREATY

ARTICLE 2 (3) – GENERAL CLAUSE

The existing taxes to which the Convention shall apply are in particular :
(a) In the XYZ :
(b) In India :

Refer India USA DTAA referred above on Slide

ARTICLE 2(2) – INDIA UAE TREATY

1. ……
2. The existing taxes to which the Agreement shall apply are (added <<<>>>> ) : –
(a) In United Arab Emirates :
(i) income-tax ; (ii) corporation tax ; (iii) wealth-tax
(hereinafter referred to as “U.A.E. tax”) ;
(b) In India :
(i) the income-tax including any surcharge thereon ; (ii) the surtax ; and (iii) the wealth-tax
(hereinafter referred to as “Indian tax”).

ARTICLE 2(3) – INDIA GERMANY TREATY

The existing taxes to which this Agreement shall apply are in particular : –

(a) in the Federal Republic of Germany :
the Einkommensteuer (income-tax),
the Korperschaftsteuer (corporation-tax),
the Vermogensteuer (capital tax), and
the Gewerbesteuer (trade tax)
(hereinafter referred to as “German tax”);
(b) in the Republic of India,
the income-tax including any surcharge tax thereon (Einkommensteuer, einschl, darauf entfallender Zusatzsteuern), and the wealth-tax (Vermogensteuer) (hereinafter referred to as “Indian tax”).

KEY FEATURES OF ARTICLE 2(3)

Key features of Article 2(3)

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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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